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Canada’s three major condo markets — Toronto, Vancouver and Montreal — are expected to face some “instability” over the next two years as sales drop off from boom levels and starts outstrip demographic demand, says a new report written on behalf of realtor Royal LePage.

But that short-term “turbulence” is unlikely to hurt the long-term prospects of a sector that’s now critical to Canada’s housing market, according to research by veteran economist Will Dunning.

As of 2011, condos accounted for 37.7 per cent of all new dwellings in those three cities and almost 15 per cent of total households.

Demand for new condos over the next two decades in Toronto, Montreal and Vancouver combined is expected to average between 26,000 and 32,000 units per year, says the report, released Tuesday.

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And while that’s close to half the market for new housing going forward, it’s considerably below current condo starts which now average 43,774 units per year. That explosion of new units post-2006 has been driven largely by low interest rates, investor demand and “robust” job growth, especially in urban cores, notes Dunning.

Price volatility is likely over the next two years as a record number of new condos, sold in the preconstruction phase over the last few years, actually come on stream. But high rental demand, rents that are increasing at more than twice the rate of inflation, strong job growth and demand from young professional echo boomers to live close to work mean “there is no bubble in Canadian condominium markets,” says Dunning.

“Condominiums have emerged as the dominant type of new housing in contemporary urban Canada, a trend that will not be reversed in the foreseeable future,” says Royal LePage CEO Phil Soper.

“It can reasonably be expected that over the long-term, condominiums will experience price growth similar to that seen for the so-called ‘traditional’ housing forms,” says Dunning in his report.

Over the last 20 years, GTA condo prices have averaged annual gains of 5.1 per cent, not far behind the 5.9 per cent gains for single family homes, says Dunning, who is also chief economist for the Canadian Association of Accredited Mortgage Professionals.

In Montreal, condo prices have climbed by about 5.5 per cent per year over the last two decades, outstripping annual house price gains by 0.4 per cent, it notes. Vancouver condos saw price gains averaging 4.5 per cent, compared to 5.7 per cent for single-family homes.

While moderating demand is likely going forward as more immigration shifts to resource-risk areas of the country, “demographics are not always destiny” and other factors can’t be discounted. Those include the growth of single female buyers, the appeal of living and working downtown, tougher mortgage lending rules and delayed child-bearing, which have made condo living a longer-term proposition for many couples.

Construction bottlenecks, which make it difficult to build more than 16,000 to 18,000 new condos per year across the GTA, have actually helped keep the market stable and production closer to the 14,000 to 15,000 new units per year that are estimated to be needed to meet demand, says Dunning.

But questions remain about what will happen to the market in future if developers figure out a way around those bottlenecks and are able to bring a rush of condos to the market sooner than expected.

There have also been growing rumblings that high rental demand and record-high condo rental rates are set to soften, which could see many investors put their money-losing units up for sale. Many economists question that likelihood, given that the GTA vacancy rate is still a very low 1.7 per cent and even less in the high-demand core.

That assumes investors are just looking to make money on rents, says Dunning. In fact, they are also looking for long-term capital gains and know that, thanks to low interest rates, they are seeing their equity grow faster than ever.

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